Commodities Comeuppance?

The launch of metals exchange-traded funds, such as the streetTRACKS Gold (GLD Quote) and recently launched iShares Silver Trust (SLV Quote) ETFs, have made investing in commodities easier for retail investors. Those ETFs, which must be backed by real stockpiles of metals, have poured huge amounts of money in what has remained a small market.

For Leonard Kaplan, president of commodities brokerage Prospector Asset Management, the levels reached in gold and other metals can only be explained by money chasing money.

"The fundamentals don't justify this," he says. "All of a sudden, the Street believes that commodities are a financial asset, and all these investors are pouring money into a very small market."

Yet, Kaplan says that, just like Internet stocks in the 1990s, the rally in commodities can go on for much longer. "It's entirely speculative but it doesn't mean it can't go a lot higher," he says.

Even Buffett, when he made his bearish comments about commodities last weekend, admitted he's "not good at the game of figuring out how far the speculative gains will go."

Adding to the confusion, gold, which has had a halo effect on other metals, acts as both a hedge against inflation, such as soaring energy prices, and as a safe-haven asset amid rising geopolitical tensions. With oil still above $70 a barrel and the current standoff over Iran's nuclear ambitions showing no sign of abating, there could be strong support for the metal.

Dollar weakness, and the expectation of more to come, is another big factor often cited by metals bulls. A weak dollar raises the value of dollar-denominated commodities, such as gold, as it takes more of the currency to buy the same amount of the metal.

Gold bugs believe that once the Federal Reserve stops raising interest rates, the dollar will resume a multiyear decline (some say it's already under way), as currency markets start paying attention to the soaring U.S. current-account deficit. This should fuel demand for gold, the currency substitute of choice, they say.